With the recent Supreme Court decision in Wayfair having removed the traditional physical presence nexus rule, states are determining how to respond and move ahead in ramping up efforts to collect sales and use taxes from remote sellers. While Arkansas does not have a South Dakota-style economic nexus status on the books and ready to come into effect, as a Streamlined Sales Tax state, Arkansas is well positioned to adopt a regulatory or statutory change to require remote sellers to collect tax.
Arkansas has an old-school bifurcated tax structure with a sales (gross receipts) tax on in-state sales (Ark. Code Ann. tit. 26, ch. 52) and a use tax on the use of property or services in the state (Ark. Code Ann. tit. 26, ch. 53). For remote sales, the critical question is whether a seller is a "vendor" required to collect use tax. The statutory definition of "vendor" does not specify what kind of connection a person has to have in order to be a vendor subject to use tax collection obligations: "a person engaged in making sales of tangible personal property, specified digital products, digital codes, or taxable services by mail order, by advertising, or by agent, by peddling ... by soliciting, or by taking orders for such sales for storage, use, distribution, or consumption in this state." Ark. Code Ann. § 26-53-102(31).
A Department of Finance and Administration (DFA) regulation has articulated the physical presence rule. Essentially, a seller must collect use tax if it "has a physical presence ... to the full extent allowed under the United States Constitution...":
A person or enterprise that sells tangible personal property or taxable services for storage, use, distribution, or consumption in Arkansas is a vendor for the purposes of these rules when that person or enterprise has a physical presence in Arkansas either directly or through another person or enterprise to the full extent allowed by the United States Constitution Art. I, § 8, cl. 3.
This language would seem to need adjustment before Arkansas can require remote seller collection of sales and use tax. DFA could change its regulation, which could happen in the next few months. Or the General Assembly could pass legislation adjusting the definition of "vendor," either in the 2019 legislative session, or conceivably in a special session later in 2018 (although query whether the General Assembly would want to convene before the November elections).
Whether the changes are effectuated through a regulation or statute, Arkansas will face questions about how to approach nexus in a post-Wayfair world. At least the state has already adopted numerous simplifications and best practices as part of the Streamlined Sales and Use Tax Agreement, putting it in a similar situation to South Dakota. Given the existing physical presence language in rule UT-3, such changes should be prospective only. Arkansas could simply copy South Dakota's economic nexus thresholds ($100,000 of sales or 200 transactions annually) or it could push the envelope and adopt smaller thresholds. Query whether Arkansas or other states also will innovate on South Dakota's model in other respects.
In addition, the Arkansas policy response will need to take into account the triggered income tax cut under Ark. Code Ann. § 26-51-201(e). This requires DFA to reduce the tax rate in one of the brackets in the "middle class" bracket schedule of Ark. Code Ann. § 26-51-207(a)(7), to the extent that revenue from remote tax collection exceeds $70,000,000 in the first 12-month period. This provision is triggered after federal law allows Arkansas to require tax collection by sellers lacking physical presence, which now is the case. It would not be surprising to see this triggered tax cut changed or removed by the General Assembly: the Tax Reform and Relief Legislative Task Force may identify better tax reform priorities needing revenue offsets, and DFA has explained to the General Assembly the practical difficulties in identifying and isolating revenue from remote sellers lacking physical presence.
DFA has not yet announced how it will approach post-Wayfair nexus for Arkansas use tax collection. Understandably such a situation requires serious policy deliberation by the state as to how best to expand Arkansas use tax collection requirements. We will continue to monitor as the situation develops.